Natural gas plays central role in Ukraine crisis

International energy politics is playing a crucial role in the current Ukraine crisis. The final outcome could very well be determined by the flow of natural gas from Russia to Ukraine and Europe.

Russia is exploiting its natural gas stranglehold on Ukraine and Europe to further its own geopolitical ambitions. Natural gas politics has played a role in the conflict from the first day.

Russia is the world’s largest producer and exporter of natural gas. Gazprom, Russia’s state-owned energy company, is the second largest oil and gas company in the world, according to Forbes.

The crisis began when Russia sought to prevent Ukraine from strengthening economic ties to western Europe. To prevent it, Putin cut a sweet deal with now-ousted Ukrainian President Viktor Yanukovych to, among other things, sell natural gas to Ukraine at a hugely discounted price.

Ukraine is dependent on foreign imports for 68 percent of its energy needs. Most of that is natural gas imported from Russia through Gazprom-owned pipelines.

The deal fell through when Yanukovych was ousted from power and fled the country. The time came due for Ukraine to pay its gas bill more than a week ago. Gazprom is now demanding $1.9 billion from Ukraine to pay that bill at the old, pre-agreement price.

President Obama is seeking a diplomatic solution to the crisis by imposing economic sanctions against Russia if it extends its territory into the Crimea and/or eastern Ukraine. But in order to do that he needs the united cooperation of Europe.

Obama started off by promising Ukraine a billion dollars in loan guarantees to keep it afloat, but that is barely half its current Gazprom bill alone.

Russia supplies much of Europe’s energy needs through a complex series of Gazprom pipelines, many that flow through Ukraine.

Europe’s economic recovery from years of recession is dependent on a continuing flow of energy from Russia.

Besides Ukraine itself, especially dependent on Russian supplied energy are Germany, Turkey and Italy. Most other countries in Europe have non-trivial dependence on Russian supplied energy.

European countries will be reluctant to impose strong economic sanctions against Russia because of their energy dependence.

Any interruption in natural gas flow would hurt all countries involved, including Russia which needs the revenue to pay its own bills.

This presents a sticky challenge to President Obama if he wants to regain foreign policy credibility again. Obama is weakened internationally for his handling of Syria and Iran, both now reneging on brokered deals.

Events on the ground are evolving quickly. Tensions are mounting. It isn’t at all clear how things will turn out.

It’s likely, though, that any solution short of armed conflict will involve Russian natural gas supplies, how much they’ll cost each country and feature freshly inked agreements guaranteeing an uninterrupted supply for the future.